Complete Home & Office Legal Guide/Complete Home and Office Legal Guide (Chestnut) (1993).ISO/stat/fed/irc31.asc

Text File | 1993-08-24 | 38KB | 699 lines

585.  Reserves for losses on loans of banks
    (a) Reserve for bad debts. --
    (1) In general. -- Except as provided in subsection (c), a
bank shall be allowed a deduction for a reasonable addition to a
reserve for bad debts.  Such deduction shall be in lieu of any
deduction under section 166(a).
    (2) Bank. -- For purposes of this section --
    (A) In general. -- The term "bank" means any bank (as
defined in section 581) other than an organization to which
section 593 applies.
    (B) Banking business of United States branch of foreign
corporation. -- The term "bank" also includes any corporation to
which subparagraph (A) would apply except for the fact that it is
a foreign corporation.  In the case of any such foreign
corporation, this section shall apply only with respect to loans
outstanding the interest on which is effectively connected with
the conduct of a banking business within the United States.
    (b) Addition to reserves for bad debts. --
    (1) General rule. -- For purposes of subsection (a), the
reasonable additions to the reserve for bad debts of any
financial institution to which this section applies shall be an
amount determined by the taxpaer which shall not exceed the
greater of --
    (A) for taxable years beginning before 1988 the addition to
the reserve for losses on loans determined under the percentage
method as provided in paragraph (2), or
    (B) the addition to the reserve for losses on loans
determined under the experioence method as provided in paragraph
(3).
    (2) Percentage method. -- The amount determined under this
paragraph for a taxable year shall be the amount necessary to
increase the balance of the reserve for losses on loans (at the
close of the taxable year) to the allowable percentage of
eligible loans outstanding at such time, except that --
    (A) If the reserve for losses on loans at the close of the
base year is less than the allowable percentage of eligible loans
outstanding at such time, the amount determined under this
paragraph with respect to the difference shall not exceed
one-fifth of such differece.
    (B) If the reserve for losses on loans at the close of the
base year is not less than the allowable percentagle of eligible
loans outstanding at such time, the amount determined under this
paragraph shall be the amount necessary to increase the balance
of the reserve at the close of the taxable year to (i) the
allowable percentage  of eligible loans outstanding at such time,
or (ii) the balance of the reserve at the close of the base year,
whichever is greater, but if the amount of eligible loans
outstanding at the close of the taxable year is less than the
amount of such loans outstanding at the close of the base year,
the amount determined under clause (ii) shall be the amount
necessary to increase the balance of the reserve at the close of
the taxable year to the amount which bears the same ratio to
eligible loans outstanding at the close of the taxable year as
the balance of the reserve at the close of the base year bears to

the amount of eligible loans outstanding at the close of the base
year.
For purposes of this paragraph, the term "allowable percentage"
means 1.8 percent for taxable years beginning before 1976; 1.2
percent for taxable years beginning after 1975 but before 1982;
1.0 percent for taxable years beginning in 1982; and 0.6 percent
for taxable years beginning after 1982.  The amount determined
under this paragraph shall not exceed 0.6 percent of eligible
loans outstanding at the close of the taxable year or an amount
sufficient to increase the reserve for losses on loans to 0.6
percent of eligible loans outstanding at the close of the taxable
year, whichever is greater.  For purposes of this paragraph, the
term "base year" means" for taxable years beginning before 1976,
the last taxable year beginning on or before July 11, 1969, for
taxable years beginning after 1975 but before 1983, the last
taxable year beginning before 1976, and for taxable years
beginning after 1982, the last taxable year beginning before
1983; except that for purposes of subparagraph (A) such term
means the last taxable year before the most recent adoption of
the percentage method, if later.
    (3) Experience method. -- The amount determined under this
paragraph for a taxable year shall be the amount necessary to
increase the balance of the reserve for losses on loans (at the
close of the taxable year) to the greater of --
    (A) the amount which bears the same ratio to loans
outstanding at the close of the taxable year as (i) the totla bad
debts sustained during the taxable year and the 5 preceding
taxable years (or, with the approval of the Secretary, a shorter
period, bears to (ii) the sum of the loans outstanding at the
close of such 6 or fewer taxable years, or
    (B) the lower of --
    (i) the balance of the reserve at the close of the base
year, or
    (ii) if the amount of loans outstanding at the close of the
taxable year is less than the amount of loans outstanding at the
close of the base year, the amount which bears the same ratio to
loans outstanding at the cloase of the taxable year as the
balance of the reserve at the close of the base year bears to the
amount of loans outsatnding at the close of the base year.
For purposes of this paragraph, the base year shall be the last
taxable year before the most recent adoption of the experioence
method, except that for taxable years beginning after 1987 the
base year shall be the last taxable year beginning before 1988.
    (4) Refulations; definition of eligible loan, etc. -- The
Secretary shall define the terms "loan" and eligible loan" and
prescribed such regulations as may be necessary to carry out the
purposes of this section; except that the term "eligible loan"
shall not include --
    (A) a loan to a bank (as defined in section 581),
    (B) a loan to a domestic branch of a foreign corporation to
which subsection (a)(2) applies,
    (C) a loan secured by a deposit (i) in the lending bank, or
(ii) in an institution described in subparagraph (A) or (B) if
the lending bank as control over withdrawal of such deposit,
    (D) a loan to or guaranteed by the United States, a
possetssion or instrumentality thereof, or a State or a political
subdivision thereof,
    (E) a loan evidenced by a security as defined in section
165(g)(2)(C),
    (F) a loan of Federal funds, and
    (G) commercial paper, including short-term promissory notes
which may be purchased on the open market.
    (c) Section not to apply to large banks. --
    (1) In general. -- In the case of a large bank, this section
shall not apply (and no deduction shall be allowed under any
other provision of this subtitle for any addition to a reserve
for bad debts).
    (2) Large banks. -- For purposes of this subsection, a bank
is a large bank if, for the taxable year (or for any preceding
taxable year beginning after December 31, 1986) --
    (A) the average adjusted bases of all assets of such bank
exceeded $500,000,000, or
    (B) such bank was a member of a parent-subsidiary controlled
group and the average adjusted bases of all assets of such group
exceeded $500,000,000.
    (3) 4-year spread of adjustments. --
    (A) In general. -- Except as provided in paragraph (4), in
the case of any bank which for its last taxable year before the
disqualification year maintained a reserve for bad debts --
    (i) the provisions of this subsection shall be treated as a
change in the method of accounting of such bank for the
disqualification year,
    (ii) such change shall be treated as having been made with
the consent of the Secretary, and
    (iii) the net amount of adjustments required by section
481(a) to be taken into account by the taxpayer shall be taken
into account in each of the 4 taxable years beginning with the
disqualification year with --
    (I) the amount taken into account for the 1st of such
taxable years being the greater of 10 percent of such net amount
or such greater amount